Pivotal Events

The following is part of Pivotal Events that was
published for our subscribers Thursday, November 19, 2009.

Signs Of The Times

Recent Years:

"Yield Curve is Banks' Silver Lining"

"The impact on a bank's bottom line works as follows: it pays 4% interest
on deposits, then lends that money at more profitable rates of, say,
5%."

- Wall Street Journal, September 18, 2007

"A little more than a week after the Fed slashed interest rates, signs
are emerging that credit markets are improving."

- Wall Street Journal, September 28, 2007

* * * * *

This Year:

"Need to develop a way to tackle asset-price bubbles...before the
whole thing comes to a catastrophic consequence."

- Bloomberg, November 5, 2009

U.K. Chancellor of the Exchequer

Since the first in 1720 great bubbles have occurred whether the currency
is convertible or fiat. The culture of policymaking rests upon the notion
that economies are national and being random can be managed. The main tool
has been econometric modeling that assumes that expert manipulations of interest
rates and money supply will avoid bad things from happening. Unresponsive
to contrary evidence, this theory has endured since the formation of the
Fed in 1913.

The above quote shows growing apprehension of the danger of another outbreak
of financial speculation. The problem is that interventionists have no means
of forecasting such events. They have spent most of the last 100 years in
preventing another depression without ever taking back any "stimulus". The
consequence has been a 96 percent decline in purchasing power of the senior
currency.

Some think that the policymakers are insane enough to take the dollar to
zero. They may be foolish enough to continue the attempt, but market forces
seem to be gathering that would prevent that compulsion. They could be severe
enough to drive policymakers sane.

"IMF sells 200 tons of gold to India."

- Reuters, November 3, 2009

This was the first time that the IMF has sold gold to a central bank since
2000. At the time of the LTCM failure the establishment worked hard to keep
gold down and this writer frequently talked with one of the IMF honchos.
At a desperate moment he said that they (IMF) had plenty of gold with which
to stifle rallies. He has now retired so this can be mentioned.

Gold's real price set a cyclical low at 143 in May 2007 and perhaps the
cyclical rise since (to 385) has overwhelmed official ambition to "kill" gold
rallies.

Also perhaps, the establishment outside of macro-economists is becoming
unusually concerned about deliberate policies of dollar depreciation.

"The global speculative-grade default rate rose to 12.4% in October,
surpassing the record set in 1991 for the highest proportion of defaults
since the Great Depression."

- Bloomberg, November 5, 2009

Politics:

Prompted by the same old forces of credit contraction, Washington is replicating
the New Deal that was started by Commerce Secretary Herbert Hoover in 1927
and pounded into America's culture by President Roosevelt. As led by Obama's "Chicago" political
machine, this will be as nasty and bullying as FDR's "New York" politics.
The irony is that history shows that Rome was "New Dealed" to death.

For the latter, The New Deal in Old Rome by H.J. Haskell can be read
on the internet. In 2007 Amity Shlaes published The Forgotten Man,
which covers the radicalism of Washington in the 1930s.

* * * * *

STOCK MARKETS

Clearly, the "Conundrum" of asset inflation in the midst of an historical
credit contraction continues. And as we have been noting, some asset-classes
have reached impetuous conditions. Within this, stock markets have reached
bullish sentiment that exceeded levels reached at the top of the bull market
in October 2007. Even the constantly maligned gold has reached 97 Percent Bulls,
which is without precedent on this survey.

Going the other way, the dollar bears became very excited.

It is worth checking other accomplishments made by the stock market. One is
the six-month rebound out of a crash, which counted to September when the 92
Percent Bulls registered. Another is the fifty-percent retracement that the
Dow finally registered this week. That looks after the post-crash rebound,
and as Ross has been tracking it, the Stochastic is overbought enough to limit
the move. (As of yesterday it rolled over.)

On the near-term, our October 29 edition observed that week's hit and noted
that there could be a rally into early November.

On the somewhat longer-term, in July we had expected credit conditions to
be troubled by late in the year, and while the party continues in long-dated
corporates there has been a small step to widening spreads at the shorter-maturities.

The action in credit markets and in the gold/silver ratio reminds of October
2007. Some key pieces are attached from then that show just how difficult that
transition was.

In the meantime, our October 29 advice for traders to sell the November rally "aggressively" was
a little early. However, speculation is again at exceptional levels, seemingly
on the cusp between a correction and the discovery that policymakers have at
last created the equivalent of perpetual motion.

Generally, perpetual motion has been doing poorly in the Tokyo market since
1989. This week's decline in the Nikkei is threatening the October low, and
today's trade on the EWJ has taken that out and at 9.20 is threatening the
July low of 9.10.

Bigger Picture: Financial markets have staged a magnificent post-crash
rebound, accompanied by a recovery in business. It has also been accompanied
by an heroic "stimulus", whereby the state is pre-empting spending by the private
sector. It is worth adding that "stimulus" was ramped up with the Bear Stearns
crisis and continuously applied through and beyond the panic's end in March.

As with the Second New Deal in the 1930s, today's political ambition is very
hostile to the market and will drive capital away from normal economic calculation
making any "recovery" less than optimal. Driving capital into caution also
reduces liquidity.

And apparent liquidity has been the problem. Central banks have, as usual,
been creating it out of thin air. In turn, this has been leveraged into an
immense carry-trade in the treasury curve - thus our watching for reversal.

The same goes for long-dated credit spreads. Short-dated, as represented by
the TED-Spread, have reversed to widening.

The opinions in this report are solely those of the author.
The information herein was obtained from various sources; however we do not
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